Worse to come for sub-prime loans: Fed

FEDERAL Reserve governor Susan Bies said on Friday that problems in the sub-prime mortgage market could escalate, further unnerving investors, as shares in troubled lender New Century Financial continued to plummet.
At a risk management forum in Charlotte, North Carolina, Ms Bies said lenders were likely to see an increase in defaults involving borrowers who took out mortgages with low "teaser" interest rates, which jumped higher during the life of the loan.

"The front end of this wave of teaser-rate loans are coming into full pricing," said Ms Bies. "What we're seeing in this narrow segment is the beginning of the wave - not the end. This is the beginning." She added that, so far, problems remained contained in the sub-prime sector.

The comments, reported by Bloomberg, came as shares in New Century fell another 17 per cent to $US3.21 and analysts said the firm would probably have to file for bankruptcy protection.

Also on Friday, General Electric's US home lending unit, WMC Mortgage, said it would cut back on loans and cut 460 jobs, or 20 per cent of its staff.

Concerns about the sub-prime market helped limit US stocks to modest gains in spite of solid employment numbers.

New Century shares are off nearly 80 per cent since the lender disclosed last week that federal prosecutors were probing its accounting practices and trading in its shares. The group is negotiating with lenders to extend credit agreements and is not accepting new loan applications.

JP Morgan analyst Andrew Wessel said the chances of New Century surviving were slim. "It is likely (the company) has essentially mortgaged its last unencumbered assets," he said.

Morgan Stanley has extended $US265 million ($340 million) in new financing to New Century and taken over a $US710 million facility withdrawn by Citigroup. Morgan Stanley's lending, like that extended by other banks, is secured by mortgage loans held by New Century. Banks that buy sub-prime loans from New Century to sell as securities generally have the right to sell back the loans if they go into default. But New Century might not be in a position to buy back bad loans.